Most Seniors Flunked a New Retirement Quiz. Could You Do Better?

Anyone wondering whether people in or nearing retirement are up to speed on creating a viable retirement income plan got an answer last week when the American College of Financial Services released the results of its Retirement Income Literacy Quiz. It was sobering: Nearly 75% of the 1,244 adults ages 60 to 75 who were interviewed online for the test got a big fat F (a score of 60% or less), while fewer than 6% received an A (91% or better) or a B (81% to 90%).

I'm not surprised at the less-than-impressive showing. For one thing, other tests and surveys, including a Fidelity survey I wrote about in a previous column, have revealed some pretty disconcerting gaps in people's knowledge of retirement planning. And if anything, the American College test is more challenging than others I've seen, consisting of 38 multiple-choice questions on virtually every aspect of managing one's finances in retirement.

So I have no reason to doubt Jamie Hopkins, co-director of the American College's New York Life Center For Retirement Income, when he calls it "the most comprehensive retirement literacy quiz out there."

For the most part, I felt the questions pretty well covered the main topics you'd want to have a handle on to plan for a secure retirement. They included:

• the maximum amount you can safely draw from your nest egg if you want it to last 30 years
• the right age to claim Social Security if you expect to live a long life
• which expenses are covered by Medicare and long-term-care insurance
• and the chances that at some point in life you might need assistance with activities of daily living.

That said, a few questions struck me as a little too "inside baseball," demanding a level of technical knowledge even well-informed individuals aren't likely to possess. For example, the survey asks you to identify a lifetime immediate annuity's current payout rate for a 65-year-old man—while answering another question requires that you be familiar with the nuances of a variable annuity's guaranteed lifetime withdrawal benefit rider.

I also wondered whether some of the questions—such as ones dealing with stock price/earnings ratios, bond ratings, and the types of stocks that generate the highest long-term returns—even belonged in a quiz about retirement income.

But when I expressed these concerns to Hopkins, he had reasonable explanations. He agreed that the annuity questions were difficult. Indeed, fewer than 20% of respondents correctly answered either one. But he said they were included because a lot of people in the age group surveyed are buying or have already purchased annuities, so they should understand how they work and have an idea of what they cost.

Fair enough. There's clearly a lot that people don't understand when it comes to annuities, which is why I recommend asking these three key questions before buying one.

As for the investing questions, he explained that they not only get to the important issue of the role different types of investments might play in a retirement portfolio; they're also a good barometer of the test takers' overall financial knowledge and provide insight into the relationship between financial literacy and retirement planning.

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And in fact, there is evidence that the retirees and near-retirees who fared well in the quiz are more likely to plan better and have more confidence in their ability to manage their finances. For example, the people who received a passing grade on the test were 46% more likely than those who didn't to have some strategy in place to deal with the cost of long-term care and 36% more likely to feel that they're able to manage their investments throughout retirement.

But don't just rely on my impressions of the quiz. I recommend you take it yourself, which you can do by clicking here. Even if you think you've got this whole retirement income thing nailed, I suggest you try it anyway.

After all, 61% of people who took the test felt they had a high level of retirement income knowledge, yet two-thirds of that group ended up flunking.

So give it a go. Who knows, maybe you'll buck the odds and come away with a passing grade, or even join the tiny minority (less than 1%) who scored an A. And if you find out that you don't know as much about retirement income as you thought you did—or confirm that you know as little as you suspected—at least you'll have a good idea of what you need to bone up on if you want to improve your prospects of enjoying a secure and comfortable retirement.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com. You can tweet Walter at @RealDealRetire.